Passive ETFs continue to outperform

By Mike Brown, Managing Director, etfSA.co.za

Passive ETFs continue to outperformThe results of the latest Collective Investment Schemes Quarterly Performance Survey (ASISA/Profile Data, 31/12/2018) emphasise, yet again, that passive ETFs continue to come out as the top South African investment product performers over many time periods.

Why should this be the case?

Active investment managers promise in their mandates that they will outperform their relevant benchmarks, which are the indices of total market returns.  Only by aiming for such alpha (market-beating) market returns, would they be justified in charging their high investment fees, often including performance fees.

But the track record of South African financial managers (using the Collective Investment Scheme (CIS) Survey as the benchmark) in achieving such alpha returns, is rather dismal.

Three-year returns

For instance, in the past three years (December 2015 to December 2018), the average total investment return of the 130 general equity unit trust managers was 2,04% per annum, versus 4.33% return delivered by the FTSE/JSE All Share index.  Only 28 of the 130 fund managers (21.5%), were able to beat the index benchmark over this period.

Five-year returns

For the five-year period, the results were broadly similar.  The All Share index returned 5.77% per annum over the five years to December 2018, but the average equity manager’s return was only 3.90%.  Only 14 out of 104 asset managers in the Survey were able to outperform the index over this period.

Percentage of general equity managers who outperformed and underperformed

But, surely you would think even if the industry returns were below average, at least the top-performing fund managers would typically be active rather than passive managers?

The table below is therefore most instructive.  Looking at periods for one year through to ten years, the top-performing CIS funds in South Africa have often been passive ETFs and not, as you might expect, actively managed funds.

Top-performing individual collective investment schemes

Index-tracking passive ETFs, as shown in the table above, rank from first to third in each of these periods surveyed.

This success of passive managers is even more noteworthy because:

  • Of the 1 244 registered CIS funds in South Africa, fewer than 70 are passively managed. For passively managed funds to perform so well in such a large universe of actively managed funds, is significant.
  • The CIS funds monitored in the Quarterly Performance Survey, exclude all Exchange Traded Notes (ETNs) and commodity-based ETFs. Including such commodity ETFs would have meant that the top-performing SA funds for periods of one through five years would have always been commodity-tracker ETFs.
  • The great majority of SA index-tracking ETFs are based on market-capitalisation-weighted indices which should leave plenty of scope for active managers to pursue other investment strategies in order to outperform relatively simple market-size-based indices.

The question remains, is the South African active management industry producing value for money, when it overwhelmingly fails to beat passive ETFs in both average returns and in market-beating investment performance?

This post was based on a press release issued by etfSA.co.za

4 CommentsLeave a comment

  • I was wondering how financially sound it would be to invest using ETF Sa or are there other ETF service providers/management companies that you would recommend

    • ETFSA offers the full range of ETFs. You could also use EasyEquities which has a wide range. Alternatively if you stick to one provider like Satrix or Coreshares, then you can use their platforms. Its about cost vs convenience

      • Thanks a million you’re advice has really helped me turn my life around I’m only. 10 months ago on my birthday I was broke and watching your show on eTV. Now I have done a complete 360. I wish I had known about you when I was fresh out of Uni cause that’s when the big financial mistakes became habits

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